The Great Recession's Impact
on the Construction Industry
IndustryView
The construction industry was undoubtedly one of the hardest-hit by the Great Recession. Even though the recession officially ended in 2009, the industry as a whole has struggled to bounce back to its pre-recession levels. Still, there remain a number of positive trends in various sectors of the industry.
To better understand what the construction market looks like today, we examined U.S. Census Bureau data on the monthly valuation of construction work put in place as well as the 2014 Inc. 5000 list of fastest-growing companies, to see which firms in the construction sector are doing the best amidst tough times.
Key Findings:
- The most recent total monthly valuation of all construction projects in place is $981 billion: 80 percent of its pre-recession peak.
- While the market for new residential construction is still struggling, the market for residential renovation services has remained relatively consistent.
- Fewer construction firms are on the 2014 Inc. 5000 List than in 2007, but their average three-year growth has more than doubled (403 percent, vs. 195 percent in 2007).
Construction Spending at 80 Percent of Pre-Recession Peak
The Census data used in this report utilizes a measure called “value of construction put in place,” which the agency defines as “the value of construction installed or erected at the site during a given period.” That figure is comprised of:
- Cost of materials.
- Cost of labor.
- Contractor’s profit.
- Cost of architectural and engineering work.
- Other overhead costs.
- Interest and taxes paid during construction.
In July 2014, the total monthly valuation for all construction put in place (both public and private) was $981 billion. Sound like a lot? Consider the construction sector’s peak back in March 2006, when it reached $1.2 trillion. Total monthly valuation for private construction, largely driven by the housing sector (which accounted for as much as half of all private construction in 2006) took the biggest hit, falling over 50 percent: from $961 billion in March 2006 to $466 billion in January 2011.
Conversely, public funds, largely in the form of the American Recovery and Reinvestment Act of 2009—more commonly known as the “stimulus”—helped to buoy a decent chunk of the construction industry. Monthly valuation of public construction projects actually reached its peak of $322 billion in July 2009, when the economy was in its worst state of the recession. By July 2014, monthly valuation of public construction projects had dropped to $279 billion.
Monthly Valuation of All Construction Projects, 2002-2014
Source: U.S. Census, Construction Spending, July 2014
New Residential Construction Slowly Bounces Back
In February 2006, monthly valuation of new private-sector, single-family home construction peaked at $470 billion. Then the bubble burst, and by May 2009, monthly spending had bottomed out at $91 billion. By July 2014, monthly spending bounced back to $187 billion—but this was still only 40 percent of its pre-recession peak.
Meanwhile, the market for residential improvements and renovations weathered the storm. In February 2006, monthly spending on residential improvements clocked in at $150 billion—and it remained above $100 billion even during the recession. In December 2013, it reached its highest point since before the recession hit ($144 billion). By July 2014, monthly residential improvement spending had dipped a bit, to $127 billion.
Monthly Valuation of Residential Construction, 2002-2014
Source: U.S. Census, Construction Spending, July 2014
What does this mean? Primarily, it means that as long as people live in homes, money will be spent on fixing them up. Secondarily, as the market for housing came to favor buyers over sellers during the recession and its aftermath, many homeowners continued to invest in renovating and upgrading their homes—presumably to increase their resale value.
The rash of foreclosures also boosted the renovations market, with real estate investment firms and small-time home-flippers snatching up foreclosed properties and putting money into them to boost their value on the market.
To drill down even further, our final survey asked respondents which specific effort in each broad category would make them more likely to purchase a company’s products, with the chance to provide their own, open-ended response.
Health Care Construction Stutters, but Education Tumbles
The recession caused many state governments to slash budgets for education. Though the federal government allocated $20 billion of stimulus funding for public school renovation and modernization, it was not enough to stymie the overall decline in public education construction funding. As of July 2014, valuation of public education construction was $63 billion—two-thirds of its March 2009 peak ($93 billion).
Monthly valuation for health care construction hasn’t fared much better. Though monthly valuation of public health care construction has remained relatively constant, monthly valuation of private health care construction—which typically accounts for between two-thirds and three-fourths of all health care construction monthly valuations—has steadily declined since its November 2009 peak ($40 billion). By July 2014, private health care construction valuation was just $29 billion.
Monthly Valuation of Education and Health Care Construction, 2002-2014
Manufacturing Makes a Comeback, While Energy Booms
Manufacturing was dealt a serious blow during the recession, with monthly valuation falling over 50 percent—dropping from its January 2009 peak of $64 billion to just $31 billion in December 2010. However, in July 2014, monthly valuation for manufacturing construction was back up to $58 billion.
The oil and natural gas boom in such states as North Dakota and Texas has made energy, on the other hand, perhaps the most recession-proof industry: It seems to know no direction but up. Of all of the major economic sectors, energy is the only one in which monthly valuation for construction put in place has been typically higher than its pre-recession levels. Monthly valuation for energy construction projects clocked in at $97 billion in July 2014.
While there are some cyclical fluctuations, these are largely the result of massive oil and natural gas development projects—pipelines, refineries, storage etc.—that are rapidly constructed and completed, resulting in steep declines and and gains in relatively short periods of time.
Monthly Valuation of Manufacturing and Energy Construction, 2002-2014
Now that we’ve looked at the industry at a macroeconomic scale, let’s look at the microeconomic level: the firms that are driving growth in the industry.
Fewer, but More Competitive, Construction Firms on Inc.’s 2014 List
The construction firms on the Inc. 5000 lists offer another perspective on how the recession has impacted the industry. The 2007 Inc. 5000 list, for example, had 548 construction firms on it. On the 2014 list, that number had fallen to 198.
Construction Firms on Inc. 5000 Lists, 2007-2014
What’s interesting, however, is that while in 2014 Inc. recognizes fewer total rapidly growing construction firms, the ones it does include are growing faster than ever. In 2007, the average three-year revenue growth for construction firms was 195 percent—but in 2014, that average growth more than doubled, reaching 403 percent.
Growth of Construction Firms on Inc. 5000 Lists, 2007-2014
Construction firms offering niche services, including plumbing, heating and cooling, electrical, roofing, painting, interior design and more accounted for 55 percent of all of the construction firms on Inc.’s 2014 list. Not coincidentally, these are firms that run the broad gamut of renovative services: the construction sector that held the most steady during the recession. (Indeed, of these niche firms, 64 percent served residential clients.)
General contracting and design and management firms—the companies that build, design and/or oversee the construction of new structures—accounted for 44 percent of the firms on Inc.’s list.
Demographics: Types of Construction Firms on 2014 Inc. 5000 List
Conclusions
A confluence of factors dealt a tremendous blow to the construction industry over the past 10-odd years—primarily the subprime mortgage crisis, which resulted in foreclosures, falling home prices and decreased consumer demand and spending, stunting growth across many sectors.
However, this report highlights some bright spots in the industry. Smaller, niche construction firms have been able to carve out their place in the economic playground. While fewer homes are being built, many people are opting to renovate and improve their homes—increasing their homes’ value, while also driving business to these niche firms.
While health care, manufacturing, education and housing construction all remain in flux, the energy sector has been the most promising—but only time will tell if that is another bubble waiting to burst.
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